Mixed housing data, among rising interest rates are already hurting shares of companies related to the housing market. What’s more, higher vitality and uncertainty related to the geopolitical risk in Syria affect the global financial markets. Let’s analyze three stocks of companies directly related to the housing market through wood building products they make.

Highly Dependent on General Market Conditions And Particular Customers

Universal Forest Products Inc. (NASDAQ:UFPI) is a holding company that provides capital, management and administrative resources to subsidiaries that design, manufacture and market wood and wood-alternative products. It currently consumes about 7 percent of North American softwood lumber production per year.

On the bright side, an increase in home improvement spending and national housing starts is likely to benefit the company. Management is focusing its energy on business expansion and new product initiatives, to gain market share. Last November they purchased Nepa Pallet assets that strengthened the company’s position in the Northwest region of the US. What’s more, in January they have also acquired Custom Caseworks that enabled growth of industrial business through new product offerings.

On the risky side, growth could be impaired by a high volatility in the cost of lumber products from primary producers. The price of lumber products depends not only on supply and demand in the market, but also on external factors like government and environmental regulations, weather conditions, economic conditions and natural disasters. An increase in lumber costs will increase cost of inventory and eat in margins on fixed priced lumber products.

Hedge fund gurus like Joel Greenblatt and Arnold Van Den Berg sold out the stock of their portfolios. Current trailing twelve month earnings multiple is 35.5 times, compared with 33.3 times for the peer group. Thus, a Neutral recommendation on the stock anticipates that the company will perform in line with the broader market.

Increase Demand for Pulpwood and Biomass for Power Generation and Biofuel Production.

Plum Creek Timber Co Inc. (NYSE:PCL) owns 6.4 million acres of timberland across 19 states and manages timberland and manufactures wood products. The company is structured as a REIT (Real Estate Investment Trust), and so, it is not required to pay federal income taxes on earnings generated by timber harvest activities. Other earnings, like those from its wood products and real estate segments are subject to federal income tax.

Operating in a commodity market, Plum Creek lacks a low-cost production position and so struggles to exert some pricing power. Therefore, the company tries to diversify its natural resource businesses and also looks for opportunities for oil and natural gas production, rock and mineral extraction, as well as communication and transportation.

Among Plum Creek's primary risks we can mention a prolonged weakness in residential construction, the seasonality of the forest products industry and a failure to maintain its REIT qualification. In addition, an adverse environmental legislation, poor weather conditions and natural disasters. Furthermore, wood products face increasing competition from a variety of substitute products such as non-wood and engineering wood products. Consequently, the company is under severe stress to maintain profitability. Counterweighing the demand lost from paper consumption, is an increase demand for pulpwood and biomass for power generation and biofuel production.

Plum Creek has a trailing twelve month ROE of 19.8%, compared with the industry average of 15.8%, which implies that the company reinvests its earnings more efficiently than its industry peers. Hedge fund gurus like Pioneer Investments and Steven Cohen have recently added this stock to their portfolios. Thus, I would advise investors to Hold on Plum Creek shares at the time.

Most Productive and Valuable Timberland Among the Major Timber REITs

Weyerhaeuser Co (NYSE:WY) operates four primary business segments: timberlands (owns 6.6 million acres), wood products, cellulose fibers, and real estate. Like Plum Creek, Weyerhaeuser is also structured as a REIT and is not required to pay federal income taxes on earnings generated by timber harvest activities. Weyerhaeuser exports forest products to Europe and Asia. A strong recovery in some Asian nations, such as Japan, China and Korea, will boost its export businesses. However, this highly exposes the company to foreign exchange risks.

Basically, logs are a commodity, and so Weyerhaeuser faces intense competition. Building a moat in a commodity business typically requires a low-cost production position as the prime basis for competition is selling price. On a per-acre basis, Weyerhaeuser’s timberlands are exceptionally productive and profitable. With an average EBITDA (Earnings Before Interest, Tax, Depreciations and Amortization) of $78 per acre from 2004 through 2012, much higher than peers Plum Creek ($36 per acre) and Rayonier ($54 per acre). In addition, Weyerhaeuser has a large Pacific Coast position that has the most productive tree-growing region in the country.

Weyerhaeuser’s sustainable improvement in income will depend on a comprehensive recovery in housing starts. Currently trading at 26.1 times its trailing twelve month earnings multiple, compared with 24.4 times for the peer group. Hedge fund gurus like Third Avenue Management, Steven Cohen and Paul Tudor Jones added this stock to their portfolios, suggesting a Neutral recommendation and anticipating the company to perform in line with the broader market.

In Brief

Although increasing interest rates will keep on making home equity loans more expensive, homeowners continue to flock to do-it-yourself centers to buy up lumber and other goods. All three stocks are capitalizing on an improving, yet not clear, forecast of the housing market to the benefit of their shareholders. Returns are expected to be close to their market benchmark, so these companies do not look so alluring at the time.

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